Economic/Political Risk Assessments for European Countries

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Economic/Political Risk Assessments for Select European Countries.  Turkey, Spain, Germany, Greece, France

Credit Risk assessments for select European countries.

Turkey: risk assessment

Sovereign
risk
Currency
risk
Banking
sector risk
Political
risk
Economic
structure risk
Country
risk
October 2014 BB B BB BB BB BB
Robert O’Daly (lead analyst); Aengus Collins (analyst). Published 24 October 2014, 2100 GMT.
This sovereign rating is issued by The Economist Intelligence Unit credit rating agency, registered in accordance with Regulation (EC) No 1060/2009 of 16 September 2009, on credit rating agencies, as amended, and is issued pursuant to such regulation.

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Sovereign risk

The government debt/GDP ratio has fallen below 40% of GDP and The Economist Intelligence Unit expects fiscal policy to be kept fairly tight, despite the general election due in mid-2015, chiefly out of concern for the still large current‑account deficit.

Currency risk

The large current-account deficit and tighter global liquidity leave the Turkish lira susceptible to downward pressure. This forced the Central Bank of Turkey to raise official interest rates from historically low levels at the end of January 2014. Political pressure for rate cuts could undermine investor confidence in the Central Bank’s ability to act to stem inflation from currency weakness.

Banking sector risk

The banking sector has high levels of capital reserves and low levels of non‑performing loans. A weaker lira will raise external debt-servicing costs. The authorities’ efforts to slow consumer credit growth may hit profits.
Credit risk score graph

Political risk

Recep Tayyip Erdogan, who had been prime minister since early 2003, became Turkey’s first directly elected president in August 2014. One of his closest allies, Ahmet Davutoglu, has become leader of the Justice and Development Party (AKP) and prime minister, which should ensure that Mr Erdogan can pursue his controversial plan to establish a presidential system of government.

Economic structure risk

The economy is heavily dependent on foreign-capital inflows for growth. These are predominantly volatile short-term inflows, as foreign direct investment remains low. The income tax base is narrow, owing to widespread evasion.

Sovereign risk

Turkey: sovereign risk
Rating
October 2014 BB
Robert O’Daly (lead analyst); Aengus Collins (analyst). Published 24 October 2014, 2100 GMT.
This sovereign rating is issued by The Economist Intelligence Unit credit rating agency, registered in accordance with Regulation (EC) No 1060/2009 of 16 September 2009, on credit rating agencies, as amended, and is issued pursuant to such regulation.

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Current assessment

Credit risk score graph
The Economist Intelligence Unit’s sovereign risk rating remains unchanged at BB. The current government’s fiscal stance has remained prudent. Although the central government deficit, which covers most of the public sector, widened substantially in January-September 2014 compared with a year earlier, as expenditure growth (at 10.5%) outpaced revenue growth (at 8.1%), we expect the full-year deficit to remain below 3% of GDP. Central government debt is low and declining, from 37.4% of GDP in 2013 to an estimated 36.4% of GDP in 2014. The debt structure has also improved markedly since the 2008‑09 global financial crisis. Domestic debt accounted for close to 70% of total central government debt in August 2014, and 78% of domestic debt was held by residents. The average maturity of Turkey’s domestic government debt was 69.1 months in January-August 2014, compared with an average of 74.3 months in 2013 and 30-35 months in 2007-09. The share of fixed-rate instruments remained high, at 65.5% in the first eight months of 2014, helping to reduce the uncertainty caused by interest-rate volatility. Foreign-currency debt accounted for 30.8% of the total debt stock, but the average maturity of external government debt was high, at 6.6 years in August 2014.

Positive factors

  • Interest payments on government debt fell to 3.2% of GDP in 2013, from 5.6% in 2009. As a share of tax revenue they were low at 14.5% in January-August 2014, compared with full-year shares of 15.3% in 2013 and 17.4% in 2012.
  • The banking sector is well capitalised, reducing the risk of the sovereign having to bail out a bank in difficulty, which would push up the debt burden.

Negative factors

  • Revenue projections tend to rely on substantial privatisation receipts, which may not materialise given the uncertain economic and political outlook.
  • Tax evasion remains widespread. Thus the government relies heavily on indirect taxation, notably a special consumption tax, to meet revenue targets.

Ratings outlook

The sovereign rating is on the cusp of the BB band, which increases the possibility of a decline to the B band. The main negative risk is global capital volatility. A much tighter monetary policy may be required to attract adequate capital inflows, prevent further lira depreciation and curb inflation. This could trigger a recession rather than a slowdown, as we currently forecast. The government’s peace negotiations with the outlawed Kurdistan Workers’ Party (PKK) raised possibility of a substantial improvement in the security situation in Turkey. However, as illustrated by the eruption of protests and riots in the Kurdish-inhabited south-east of Turkey and air strikes by the Turkish air force on PKK positions in October, a lasting settlement is still some way off.

 

 

France: risk assessment
Sovereign
risk
Currency
risk
Banking
sector risk
Political
risk
Economic
structure risk
Country
risk
August 2014 A BB A AA A A
Aengus Collins (lead analyst); Robert O’Daly (analyst). Published 15 August 2014, 2100 GMT.
This sovereign rating is issued by The Economist Intelligence Unit credit rating agency, registered in accordance with Regulation (EC) No 1060/2009 of 16 September 2009, on credit rating agencies, as amended, and is issued pursuant to such regulation.

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Sovereign risk

The budget deficit is forecast to narrow from 4.2% of GDP in 2013 to 4% of GDP in 2014. However, a weakening growth outlook has increased the fiscal headwinds and The Economist Intelligence Unit now expects France to reach the Maastricht ceiling of 3% of GDP in 2017, two years behind target. Public debt will continue to rise throughout the forecast period; reaching 95.4% in 2015.

Currency risk

The euro has weakened against the US dollar since mid-May 2014. We expect this trend to continue into 2015, driven largely by growing divergences between economic performance and monetary policy in the euro zone and the US. The risk of one or more vulnerable countries leaving the euro zone has diminished sharply since mid-2012 but cannot be discounted entirely.

Banking sector risk

The conclusion in late-2014 of an asset quality review and a round of stress tests across the euro zone should lead to improved confidence in the bloc’s banking sector. However, credit conditions are likely to be slow to recover and in France businesses’ weak profitability will continue to exert a drag on the performance of the country’s banks.
Credit risk score graph

Political risk

France’s rating on the political risk category has dropped from AAA to AA owing to the significant escalation of tensions between the EU and Russia. France’s key exposure to Russia is in the defence and finance sectors; among the developed economies, its banks have the largest claims on Russian banks. More generally, the government has struggled to formulate and implement a clear policy programme. With the mainstream centre-right opposition in disarray, the far-right populist Front national (FN) has made rapid gains.

Economic structure risk

Weak competitiveness will continue to weigh on France’s economic prospects over the medium term.

 

Sovereign risk

France: sovereign risk
Rating
August 2014 A
Aengus Collins (lead analyst); Robert O’Daly (analyst). Published 15 August 2014, 2100 GMT.
This sovereign rating is issued by The Economist Intelligence Unit credit rating agency, registered in accordance with Regulation (EC) No 1060/2009 of 16 September 2009, on credit rating agencies, as amended, and is issued pursuant to such regulation.

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Current assessment

The rating of A is unchanged.

Rating outlook

France’s sovereign rating remains unchanged, but this masks divergent trends on a number of the factors that determine the rating. Broadly speaking, improvements on the current account and on France’s access to finance have been offset by a worsening of the fiscal position and of geopolitical tensions. The country remains at the riskier end of the A band, but the list of potential triggers for a downgrade over the coming 12 months has lengthened. It now includes: a further weakening of the economy’s performance, continued failure by the government to push through much-needed fiscal and structural reforms, another ratcheting up of EU-Russia sanctions, and increased financial-market volatility stemming from a renewed intensification of the euro zone crisis. An upgrade of France’s sovereign rating to AA would require significant improve‑ments across a number of dimensions, which at present seems unlikely over the next 12 months. Of particular importance will be the government’s efforts to stem the economy’s slowdown and to make more rapid progress on structural economic reforms.

 

Germany: risk assessment
Sovereign
risk
Currency
risk
Banking
sector risk
Political
risk
Economic
structure risk
Country
risk
October 2014 A BB A AA A A
Richard Grieveson (lead analyst); John Bowler (analyst). Published 17 October 2014, 2100 GMT.
This sovereign rating is issued by The Economist Intelligence Unit credit rating agency, registered in accordance with Regulation (EC) No 1060/2009 of 16 September 2009, on credit rating agencies, as amended, and is issued pursuant to such regulation.

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Sovereign risk

Germany’s stock of public debt is comparatively high, but its budget is in surplus. Established political and public support for fiscal discipline reduces domestic risk to the public finances. However, bank bail-out costs may rise and continued use of the sovereign balance sheet to support the euro zone would strain creditworthiness.

Currency risk

The euro is supported by a current-account surplus and a strengthening capital account position, as capital outflows from the periphery have reversed. However, growth in the bloc is stalling owing to an exchange of sanctions between the EU and Russia and weakness in Germany, France and Italy. This, and the outlook for a growing interest-rate differential against the US dollar, will see the euro continue to weaken in 2015-16.

Banking sector risk

Banks have significant exposure to peripheral euro zone debt, which could lead to losses over time. There are some concerns about smaller regional lenders. Reforms to strengthen the banking sector are under way, but low profitability, high leverage and fragile balance sheets will remain a concern.
Credit risk score graph

Political risk

The Economist Intelligence Unit expects the grand coalition of the centre-right Christian Democratic Union (CDU)/Christian Social Union (CSU) and the centre-left Social Democratic Party (SPD) to last its full four-year term to 2017. The re-election of the CDU chancellor, Angela Merkel, provides a degree of stability, although there has been a slight leftward shift, both in parliament and in policy.

Economic structure risk

Over-dependence on exports, especially of capital and transport goods, has exposed Germany to an external downturn. Demand from key markets—notably France, China and Russia—looks increasingly weak. The recent decision to introduce a national minimum wage poses some risks to competitiveness.

 

Sovereign risk

Germany: sovereign risk
Rating
October 2014 A
Richard Grieveson (lead analyst); John Bowler (analyst). Published 17 October 2014, 2100 GMT.
This sovereign rating is issued by The Economist Intelligence Unit credit rating agency, registered in accordance with Regulation (EC) No 1060/2009 of 16 September 2009, on credit rating agencies, as amended, and is issued pursuant to such regulation.

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Current assessment

The rating of A is unchanged.

Rating outlook

Despite a 1-point increase in the score since The Economist Intelligence Unit’s last ratings report—largely reflecting the marked slowdown in growth owing to weakness in key external markets—the sovereign rating lies towards the less risky end of the A band, implying better prospects for a future upgrade than downgrade. We estimate that the public-sector debt/GDP ratio will have fallen to the equivalent of 74.7% of GDP in 2014, before dropping further, to 73.1% in 2015 and 71.4% in 2016.

However, although public debt dynamics are clearly improving (reinforced by a strong fiscal position—we see the budget remaining in surplus in 2015-16) and economic growth remains robust, the potential for a ratings upgrade has receded further since our last report. This is owing to a deterioration in external conditions, which means that we now estimate growth of 1.3% in 2014 (compared with 2% at the time of our last report), and forecast average growth of 1.6% in 2015-16, with risks to the downside.

Demand in several key external markets has weakened, owing t0 structural problems (in the case of France and Italy) and an exchange of sanctions between Russia and the EU, which has damaged growth on both sides. The hefty impact of this on German output (with exports and industrial production plunging in August) has brought into focus the economy’s reliance on manufactured exports to drive growth. Given the importance of the manufacturing industry to employment, the feed-through channels of this to the domestic economy are clear.

We expect EU sanctions on Russia to be relaxed from mid-2015, which will lift trade volumes and sentiment across the region. This will underpin a return to stronger growth in Germany from the second half of 2015. However, there are clear downside risks to our view.

A ratings downgrade remains unlikely, but could be threatened by another escalation of the euro zone crisis, possibly triggered by a financial sector shock—there is significant counter‑party risk to German banks stemming from undercapitalised institutions across the region—by a rise in political tensions across the region or by a loss of investor confidence in the ability and/or willingness of the European Central Bank (ECB) to do “whatever it takes” to preserve the euro zone.

 

Greece: risk assessment
Sovereign
risk
Currency
risk
Banking
sector risk
Political
risk
Economic
structure risk
Country
risk
October 2014 CCC BB B CCC CCC B
Joan Hoey (lead analyst); Robert O’Daly (analyst). Published 24 October 2014, 2100 GMT.
This sovereign rating is issued by The Economist Intelligence Unit credit rating agency, registered in accordance with Regulation (EC) No 1060/2009 of 16 September 2009, on credit rating agencies, as amended, and is issued pursuant to such regulation.

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Sovereign risk

The sustainability of Greece’s public debt, which is equal to about 175% of GDP, is a key concern given the government’s desire to exit the bail-out programme and growing risks to political stability. Our sovereign rating indicates a high probability of default or restructuring; our baseline forecast is that Greece will receive further debt relief, probably in the form of longer maturities and/or cuts in interest rates.

Currency risk

The euro is supported by a current-account surplus and a strengthening capital account position, as capital outflows from the periphery have reversed. However, growth in the bloc is stalling owing to an exchange of sanctions between the EU and Russia, and weakness in Germany, France and Italy. Combined with a growing interest-rate differential against the US dollar, this will see the euro continue to weaken in 2015-16.

Banking sector risk

The results of the European Central Bank (ECB) stress tests and asset quality review of Greek banks will be revealed at end-October, ending uncertainty over Greek banks’ capital adequacy. They will also indicate the funds that remain unused at the Hellenic Financial Stability Fund (HFSF), the body established in 2010 to support the stability of the Greek banking system.
Credit risk score graph

Political risk

Political risk will remain very high. The government has a parliamentary majority of five and will struggle to muster the two-thirds majority required to elect a new president in early 2015. Failure will trigger an early election. If the opinion-poll lead of the left-wing, anti-austerity Syriza Unifying Social Front is repeated at an election, it will be almost impossible for New Democracy to form a government, raising the risk of repeat elections, as in 2012.

Economic structure risk

The current account is set to record modest surpluses, but both public and external debt/GDP ratios remain very high. Despite successful bond issues Greece will remain dependent on official financing.

 

Sovereign risk

Greece: sovereign risk
Rating
October 2014 CCC
Joan Hoey (lead analyst); Robert O’Daly (analyst). Published 24 October 2014, 2100 GMT.
This sovereign rating is issued by The Economist Intelligence Unit credit rating agency, registered in accordance with Regulation (EC) No 1060/2009 of 16 September 2009, on credit rating agencies, as amended, and is issued pursuant to such regulation.

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Current assessment

There is no change in the rating compared with July. There was a gradual improvement in sovereign risk in the 12 months to July 2014, but uncertainty has increased in October because of the government’s stated aim of exiting its bail-out programme and the increasing risk of an early election in 2015.

Rating outlook

Greece’s sovereign rating is under pressure because of potential political instability in 2015 and uncertainty about the government’s ability to finance its debt payments if it exits the bail-out programme. However, the economic recovery is expected to gather pace in 2015, which would benefit the public finances on both the revenue and expenditure side.

At the equivalent of around 175% of GDP, Greece’s public debt poses obvious financing concerns. These have been mitigated until now by the government’s adherence to the country’s €240bn EU/IMF bail-out programme, and by the low cost and long maturities of the official credit being extended. However, the EU portion of the bail-out programme expires at the end of 2014, and the prime minister, Antonis Samaras, has said that his government does not want to sign up for another. He has also said that the government may treat the IMF loan programme (which runs to February 2016) as precautionary in 2015-16, and decline further loan disbursements. Yields on Greek bonds moved above 7% in mid-October, indicating that the government’s intentions lack credibility—especially in the context of increasing political instability risk in early 2015, when Greece must elect a new president or face the prospect of a pre-term election, which opinion polls suggest would be won by the anti-bail-out Syriza.

The government argues that it can manage without a further bail-out by having recourse to unused bank recapitalisation funds, increased borrowing on the international capital markets and internal borrowing operations. The government hopes that a second debt restructuring deal, involving an extension of existing loan maturities, will be negotiated by the end of the year, improving its credibility and the terms of market access. We expect the country to receive further official debt relief from its creditors (via additional reductions in interest rates and longer maturities). However, given the unstable political situation, and the size of Greece’s borrowing needs in 2014-16, we are sceptical that the government will be able to manage without continued official financing for some time to come.

 

 

Spain: risk assessment
Sovereign
risk
Currency
risk
Banking
sector risk
Political
risk
Economic
structure risk
Country
risk
October 2014 BBB BB BBB BBB BBB BBB
Aengus Collins (lead analyst); John Bowler (analyst). Published 24 October 2014, 2100 GMT.
This sovereign rating is issued by The Economist Intelligence Unit credit rating agency, registered in accordance with Regulation (EC) No 1060/2009 of 16 September 2009, on credit rating agencies, as amended, and is issued pursuant to such regulation.

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Sovereign risk

The budget deficit will narrow in 2014-16, but despite EU-wide methodological changes that have nudged down fiscal ratios, the government looks unlikely to meet its target of 3% of GDP by 2016. Public debt will peak at 102% of GDP in 2016; despite a plunge in yields, long-term debt sustainability is not assured.

Currency risk

The euro’s resilience against the US dollar has waned since late May as the euro zone’s economic outlook has worsened. We expect the euro’s depreciation to persist into 2015, as the currency’s attractiveness is dimmed by increasingly divergent monetary policy stances and economic growth rates vis-à-vis the US.

Banking sector risk

Spain’s solid economic recovery has bolstered the health of its banking sector, but significant weaknesses remain, including low profitability and rising non-performing loans. Further improvements are likely following the October results of a detailed review conducted by the European Central Bank (ECB).
Credit risk score graph

Political risk

The Popular Party (PP) government has a solid majority, but public discontent is mounting. This will shape the run-up to the 2015 general election, threatening policy continuity. Regional nationalism has strengthened, particularly in Catalonia; the government is likely, reluctantly, to concede greater autonomy.

Economic structure risk

Upgraded to BBB. A reduction of unit labour costs has boosted Spain’s external position, bringing the current account into surplus in 2013. Softening export demand will weigh on the current account, but we expect it to remain in surplus in 2014-16. Legacies of the crisis remain; in particular high levels of public and private indebtedness continue to exert a drag on economic growth.

 

Sovereign risk

Spain: sovereign risk
Rating
October 2014 BBB
Aengus Collins (lead analyst); John Bowler (analyst). Published 24 October 2014, 2100 GMT.
This sovereign rating is issued by The Economist Intelligence Unit credit rating agency, registered in accordance with Regulation (EC) No 1060/2009 of 16 September 2009, on credit rating agencies, as amended, and is issued pursuant to such regulation.

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Current assessment

The Economist Intelligence Unit is maintaining its sovereign risk rating of BBB. Solid improvements in Spain’s economic performance and fiscal dynamics this year have already been captured in an upgrade from BB in January 2014 and a move from the risky end to the middle of the BBB band in July. The country’s position in the BBB band is unchanged in October. Worsening inflation dynamics weighed on the score but were offset by improvements to the fiscal balance and to real interest rates. Sovereign bond yields remain at very low levels and Spain has capitalised on favourable sentiment in order to expand its funding options by issuing new inflation-linked debt securities.

Rating outlook

Given that the rating remains in the middle of the BBB band, an imminent revision either upwards or downwards is unlikely. As the outlook for the euro zone economy has darkened in recent months, the balance of risks has shifted slightly towards the possibility of the next move in the rating being downwards. Potential causes might include: a sharp worsening of demand conditions in key export markets; increased volatility in global financial markets leading to a sharp re-pricing of sovereign risk across the euro zone; the emergence of further contingent liabilities for the sovereign in the Spanish banking sector; a loss of fiscal control ahead of next year’s municipal and general elections in Spain; and political instability related to the diminished authority of Spain’s two large mainstream parties and the rise of anti-establishment parties. An upgrade to the A band would require further substantial improvements, such as a sharper than expected acceleration of real GDP growth, or a more concerted attempt to narrow the budget deficit than we think is likely ahead of next year’s elections.